In comparison-and it is a tough job; I do not blame anybody, because a great many of the loans were hard to make; many of them are good-the R. F. Č. has made something over 9,000 loans-they authorized that many-aggregating about $550,000,000. Now, of that $550,000,000 and those 9,000 loans, banks have agreed to take participation of 2,497 loans, aggregating $67,793,895. We share in the loan and the security and repayments in proportion to our percentage of the loan with the bank. Now, answering that other question, if the bank wants to carry the entire loan, we let him carry it. We charge a part of the interest. for a take-out agreement for our participation in the loan. He can call on us any day he wants to for that money and get it. Of that five-hundred-and-fifty-odd million dollars that we have authorized, one-hundred-and-thirty-four-odd million, for one reason or another, was canceled. The borrower did not take the money or he could not put up the security; $129,000,000 is now still available to the borrowers and is being drawn on from time to time. Most of it is budgeted and is taken out as they need it and they pay interest on it only as they draw it. We have disbursed, including participation with the banks, something like $305,000,000 in the form of business loans; 37 percent of these loans in number have been for $5,000 or less; 53 percent for $10,000 or less; and 83 percent for $50,000 or less. So that the great majority-the overwhelming majority of these loans has been to the small-business man, and that is how we like it. Senator WAGNER. What has been your experience in connection those loans? Mr. JONES. I was going to give it to you now, because I think you ought to have that. We have foreclosed 306 loans, aggregating $18,535,801. Now, on those loans we will lose at least one-half. The security that we took, the plants, et cetera, will not liquidate more than half the loans, probably not quite half. We have something over 900 loans aggregating approximately $25,000,000, that are in default. A good many of those will have to be foreclosed. We estimate that on all of our industrial loans the losses will average at least 10 percent. Banks just cannot make loans where they are going to have a 10-percent loss. We could not do it except that we make a little something on the other loans and that will take care of our losses, but we will lose something like 10 percent on those loans. Senator WAGNER. I read in the New York Times, I think it was, that you sold $20,000,000 worth of securities and made a million and a half in that transaction, so that there are other fields in which you make up for those losses? Mr. JONES. Yes. We have accumulated $285,000,000 or $290,000,000 in surplus, as you have been told. I think $100,000,000 to $125,000,000 will cover our total losses. Business loans take two-thirds of all the time of the executives and the board. We try as hard as human beings can try to make them. Senator WAGNER. Just looking at your enterprise as a business enterprise, would you regard it as a sound one? Mr. JONES. Yes. Senator HUGHES. Does it result in recognizing a class of borrowers who are good? Mr. JONES. Yes; it does. In other words, our rates are 4, 4%, and 5 percent on industrial loans. We borrow money on 1 percent. We operate for about 1 percent. So that gives us a margin to accumulate these surpluses. A well-run bank has got to do that, and we do favor the small business loan, because the sympathies of the country and the sympathies of Congress and the sympathies of all of us are with that fellow, and we try very hard to help him and we take pretty long chances. We have been given enough security always in appraised values, but a plant might be appraised at $1,000,000 or $100,000, and when you liquidate it you do not get much out of it. Now, it is not all bad. We have had many loans that come right along and pay with the calendar. I could cite you any number of loans that have saved businesses and kept people employed and saved communities from W. P. A. rolls, and things of that kind. I am heartily in favor of it, but it has its hazards and it has a big casualty percentage. Is Senator Mead here? Senator WAGNER. No; he just left. Mr. JONES. I spoke to him about this, and the only suggestion he had about it was that he wondered how the Federal Reserve would feel about it. Naturally, they would want to be heard, I suppose, on this suggestion. Senator WAGNER. You did not communicate with them in any way? Mr. JONES. No; I just worked on it this morning, Senator. I found out you were going to have this and I have been trying to do something that would be helpful, and I think this would be helpful, particularly in an emergency. Senator WAGNER (chairman of the subcommittee). Well, we will have to adjourn this hearing at this time. I will have to confer with Senator Mead as to the date on which we shall continue. (Thereupon, at 12:15 o'clock p. m., an adjournment was taken, subject to the call of the chairman of the subcommittee.) (The following letter was submitted by Mr. Eccles for inclusion in the record.) BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Hon. ROBERT F. WAGNER, United States Senate, Washington, D. C. DEAR SENATOR WAGNER: At the hearing on Senator Mead's bill, S. 3839, on Wednesday, June 13, 1940, you read extracts from a letter received from Mr. D. W. Bell, Acting Secretary of the Treasury, with respect to the bill and at the conclusion of the hearing you gave me a copy of Mr. Bell's letter for our information. In reading Mr. Bell's letter I found a number of statements about which I should like to comment briefly for your records. Mr. Bell states that "It is the view of the Treasury Department that if the Federal Reserve banks are to continue to make industrial loans, as contemplated by the proposed legislation, they should be permitted to do so with their own funds and the Government should withdraw its funds heretofore advanced to the banks for this purpose and terminate the authorization for further advances." For the reasons which I have stated in my testimony before your committee on S. 3839 and in correspondence with you, it is the position of the Board of Governors that section 13b of the Federal Reserve Act should be repealed and the Reserve banks entirely relieved of their responsibility for making this type of loan or that the section should be amended along the lines proposed in the bill. It was the understanding of the Federal Reserve System, when section 13b was added to the Federal Reserve Act in 1934, that it was contemplated that the Secretary of the Treasury would pay to the Federal Reserve banks such amount up to $139,299,556.99, the amount the Reserve banks subscribed to stock of the Federal Deposit Insurance Corporation, as was needed to enable them to make the advances and commitments authorized. The Secretary of the Treasury, however, issued regulations under which he advanced funds to the Federal Reserve banks amounting to approximately 50 percent of the outstanding loans and commitments of the Reserve banks. Following the issuance of the regulations by the Treasury Department, the Board conferred with the Department with respect to the accounting instructions to be issued to the Federal Reserve banks, and after several conferences instructions were prepared which the Board believed to be in accordance with the intent of Congress, and a copy was given to the Treasury. While these instructions have not received the specific approval of the Treasury, they have been the basis on which reports and payments have been made to the Treasury by the Federal Reserve banks. Mr. Bell states in his letter that it is not clear from the language of the statute whether the 2 percent payments required to be made by the Reserve banks to the Treasury constitute payments of interest or payments upon the principal amounts advanced by the Treasury to the Federal Reserve banks. He also indicates that the enactment of S. 3839 "would still leave ambiguities whereby ultimate losses from these joint transactions could be charged to the funds advanced from the Treasury." Under the existing law the Federal Reserve banks are required to make the 2 percent payments in question only if they are earned, and they have done so with the understanding that the question as to whether the payments constitute a return of principal to the Treasury is being left for determination at a later date. No determination of this question has as yet been made, but it is believed that the enactment of S. 3839 would clear up both these questions and eliminate other ambiguities of the present law. Mr. Bell points out that the aggregate outstanding loans and commitments of the Federal Reserve banks have, since April 1939, been less than the aggregate amount paid to the reserve banks by the Treasury, and that as loans and commitments were liquidated the Federal Reserve banks have withdrawn their funds and are treating the remaining loans and commitments outstanding as being financed entirely with funds received from the Treasury. This has been done because of a provision in the agreement between the Secretary of the Treasury and each Federal Reserve bank, required by the Secretary's regulations, that "Insofar as it is practicable to do so on a sound basis and in accordance with the provisions of Section 13b of the Federal Reserve Act and the regulations of the Federal Reserve Board thereunder, the Reserve Bank will keep all sums received from the Secretary under the provisions of this agreement invested in loans, discounts, advances, or purchases made under section 13b of the Federal Reserve Act; * * * "" Whether this procedure will result eventually in a profit or loss to the Treasury is impossible to state at this time, but on the basis of information now available it would appear that for the Federal Reserve banks as a whole the earnings on industrial advances and commitments will approximately offset the expenses and losses incurred in connection with such loans. * * * I understand that the letter from the Acting Secretary of the Treasury on this subject is to be included as a part of the record of the hearing which was held by your committee on June 13, 1940, and I will appreciate it if you will arrange to have a copy of this letter also included in the record of the proceedings on S. 3839. Very truly yours, X MARRINER S. ECCLES, Chairman. |